Please use this identifier to cite or link to this item: http://hdl.handle.net/10419/208306
Authors: 
Costain, James
Nakov, Anton
Petit, Borja
Year of Publication: 
2019
Series/Report no.: 
ECB Working Paper No. 2272
Abstract: 
We study the effects of monetary shocks in a model of state-dependent price and wage adjustment based on "control costs". Suppliers of retail goods and of labor are both monopolistic competitors that face idiosyncratic productivity shocks and nominal rigidities. Stickiness arises because precise decisions are costly, so agents choose to tolerate small errors in the timing of adjustments. Our simulations are calibrated to microdata on the size and frequency of price and wage changes. Money shocks have less persistent real effects in our state-dependent model than they would a time-dependent framework, but nonetheless we obtain sufficient monetary nonneutrality for consistency with macroeconomic evidence. Nonneutrality is primarily driven by wage rigidity, rather than price rigidity. State-dependent nominal rigidity implies a flatter Phillips curve as trend inflation declines, because nominal adjustments become less frequent, making short-run inflation less reactive to shocks.
Subjects: 
Nominal rigidity
state-dependent adjustment
logit equilibrium
near rationality
control costs
JEL: 
E31
D81
C73
Persistent Identifier of the first edition: 
ISBN: 
978-92-899-3534-0
Document Type: 
Working Paper

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